An old investing adage says that you can tell how tough things are for a company by the number of times the word "challenging" is used in communications to shareholders. Well, Motley Fool Hidden Gems selection MDC Holdings (NYSE:MDC) only used "challenging" once in its earnings conference call yesterday, but it was the first thing said by CEO Larry Mizel after he welcomed everyone to the call. In truth, it only needed to be said once.
One need only look at the performance of fellow homebuilders Pulte (NYSE:PHM), Toll Brothers (NYSE:TOL), and Lennar (NYSE:LEN), or the housing data coming from real estate associations, to see that it's a challenging market indeed for residential real estate.
Turning back to MDC specifically, the company saw its third-quarter revenues decrease 7.3% to $1.08 billion. Income before taxes fell 60.5% to $76.4 million, and earnings per diluted share fell 59.5% to $1.06. The drastic fall in earnings was driven by gross margins declining 6.1% and project impairments and write-offs of $29.4 million.
Digging a bit deeper, we see that MDC has a healthy balance sheet with a reasonable amount of land in inventory. By slowing down its investment in land to match the market environment, MDC also generated $70 million in operating cash flow during the quarter. But the additional sales data the company reports shows a substantial slowdown in volumes. During the quarter, the company closed 2,955 homes at an average selling price of $358,200, and the average selling price of homes in its backlog is $371,000. But that figure is down from $378,000 in the first quarter and $375,000 in the second quarter, and the company is seeing more cancellations late in its selling process, more frequently on higher-value homes.
That trend is certainly not positive, but MDC is a conservatively run company. While prices and volumes may be falling, the company, as mentioned previously, is slowing down its investment in land inventory as well. In addition, the company does very little speculative building. Such a conservative structure may mean slightly slower growth during boom periods, but it provides a great deal of stability when things get tough in the cyclical housing market.
Looking at the big picture and the relative costs of owning vs. renting, I don't see things for MDC getting materially better anytime soon. However, the company has managed to ride out the tough patches, and as land prices and building costs adjust, the company will be ready to jump in when things do look good. In the meantime, the company sells for about book value, yields 2.1%, and has a clean balance sheet. That's an attractive place to start.
A solid foundation of further Foolishness:
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At the time of publication, Nathan Parmelee had no positions in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
